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T h e V o lv o G ro u p 2 0 0 6 w w w .v o lv o .c o m

The Volvo Group 2006 By creating value for our customers, we create value for our shareholders

A global group 2 Organization 4 Volvo in society

6 Vision, mission and values 8 Market overview

10 CEO comment

12 Our customers’ needs govern our strategy…

13 1. Profitable growth

14 2. Innovation and product development 15 3. Highest quality in implementation 16 Financial strategy

18 Leading supplier of commercial transport solutions

20 Volvo 3P – Development and synergies 24 Volvo Powertrain - Uniform power 28 Long-term strategy in Asia 30 The share

Sustainable development 32 Introduction

35 Environmental responsibility 40 Social responsibility Board of Directors’ Report

46 Significant events 50 Financial performance 52 Financial position 54 Cash-flow statement 56 Risk management 59 Business areas 60 Mack Trucks 62 Renault Trucks 64 Volvo Trucks 66 Trucks 68 Buses

70 Construction Equipment 72 Volvo Penta

74 Volvo Aero 76 Financial Services

Corporate Governance Report 78 Report

82 Group Management

84 Board of Directors and auditors Financial information

87 Income statements 88 Balance sheets

89 Changes in shareholders’ equity 90 Cash-flow statements

91 Notes to the consolidated financial statements

138 Parent Company AB Volvo

152 Proposed disposition of unappropriated earnings

153 Audit Report for AB Volvo 154 Eleven-year summary 162 Customer offering

This report contains “forward-looking statements.” Such statements reflect management’s current expectations with respect to certain future events and potential financial performance. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Such statements are subject to risk and uncertainties and such future events and financial performance could differ materially from those set out in the forward looking statements as a result of, among other factors, (i) changes in economic, market and competitive conditions, (ii) success of business and operating initiatives, (iii) changes in the regulatory environment and other government actions, (iv) fluctuations in exchange rates and (v) business risk management.

The Volvo Group is one of the leading suppliers of commercial transport solutions providing products such as trucks, buses, construction equipment, drive systems for marine and industrial applications as well as aircraft engine compo- nents. The Volvo Group also offers its customers

fi nancial services.

The Group has about 83,000 employees, production facilities in 18 countries, and sales activities in some 180 countries.

During 2006 Volvo Group sales rose 7% to SEK 248 billion, with earnings per share advancing 25% to SEK 40.20. The share is listed on the Stockholm Stock Exchange and on NASDAQ in the US.

Information about IFRS

As of January 1, 2005, AB Volvo complies with International Financial Reporting Standards (IFRS), previously known as IAS, as adopted by the European Union. Figures for the corresponding peri- ods in 2004 have been restated according to IFRS. In the financial information on pages 1 to 77 Volvo Financial Services is reported in accordance with the equity method. Reporting in accor- dance with IAS 1 begins with Financial information on page 86.

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T h e V o lv o G ro u p 2 0 0 6 w w w .v o lv o .c o m

The Volvo Group 2006 By creating value for our customers, we create value for our shareholders

A global group 2 Organization 4 Volvo in society

6 Vision, mission and values 8 Market overview

10 CEO comment

12 Our customers’ needs govern our strategy…

13 1. Profitable growth

14 2. Innovation and product development 15 3. Highest quality in implementation 16 Financial strategy

18 Leading supplier of commercial transport solutions

20 Volvo 3P – Development and synergies 24 Volvo Powertrain - Uniform power 28 Long-term strategy in Asia 30 The share

Sustainable development 32 Introduction

35 Environmental responsibility 40 Social responsibility Board of Directors’ Report

46 Significant events 50 Financial performance 52 Financial position 54 Cash-flow statement 56 Risk management 59 Business areas 60 Mack Trucks 62 Renault Trucks 64 Volvo Trucks 66 Trucks 68 Buses

70 Construction Equipment 72 Volvo Penta

74 Volvo Aero 76 Financial Services

Corporate Governance Report 78 Report

82 Group Management

84 Board of Directors and auditors Financial information

87 Income statements 88 Balance sheets

89 Changes in shareholders’ equity 90 Cash-flow statements

91 Notes to the consolidated financial statements

138 Parent Company AB Volvo

152 Proposed disposition of unappropriated earnings

153 Audit Report for AB Volvo 154 Eleven-year summary

This report contains “forward-looking statements.” Such statements reflect management’s current expectations with respect to certain future events and potential financial performance. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Such statements are subject to risk and uncertainties and such future events and financial performance could differ materially from those set out in the forward looking statements as a

The Volvo Group is one of the leading suppliers of commercial transport solutions providing products such as trucks, buses, construction equipment, drive systems for marine and industrial applications as well as aircraft engine compo- nents. The Volvo Group also offers its customers

fi nancial services.

The Group has about 83,000 employees, production facilities in 18 countries, and sales activities in some 180 countries.

During 2006 Volvo Group sales rose 7% to SEK 248 billion, with earnings per share advancing 25% to SEK 40.20. The share is listed on the Stockholm Stock Exchange and on NASDAQ in the US.

Information about IFRS

As of January 1, 2005, AB Volvo complies with International Financial Reporting Standards (IFRS), previously known as IAS, as adopted by the European Union. Figures for the corresponding peri- ods in 2004 have been restated according to IFRS. In the financial information on pages 1 to 77 Volvo Financial Services is reported in accordance with the equity method. Reporting in accor- dance with IAS 1 begins with Financial information on page 86.

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North America South America Europe Asia Rest of world

Net sales, SEK M 73,657 12,533 129,613 19,610 12,722

Percentage of the Volvo Group’s sales, % 30 5 52 8 5

Production facilities

Mack Trucks Macungie, New River Valley (US) Las Tejerias (VE) Brisbane (AU)

Renault Trucks Blainville, Bourg-en-Bresse, Limoges (FR), Villaverde (ES)

Volvo Trucks New River Valley (US) Curitiba (BR) Göteborg, Umeå (SE), Gent (BE) Bangalore (IN), Jinan* (CN) Durban (ZA), Brisbane (AU)

Buses St Claire, St Eustache (CA), Mexico City (MX) Curitiba (BR) Borås, Säffle, Uddevalla (SE), Tammerfors, Åbo (FI), Wroclaw (PL) Bangalore (IN), Shanghai*, Xian* (CN) Durban (ZA) Construction Equipment Asheville (US), Goderich (CA) Pederneiras (BR) Arvika, Braås, Eskilstuna, Hallsberg (SE), Konz-Könen (DE), Belley (FR), Wroclaw (PL) Changwon (KR), Shanghai (CN), Linyi* (CN)

Volvo Penta Lexington (US) Göteborg, Vara (SE) Wuxi* (CN)

Volvo Aero Boca Raton, Newington (US) Bromma, Trollhättan (SE), Kongsberg (NO)

Volvo Powertrain Hagerstown (US) Curitiba (BR) Köping, Skövde (SE), Vénissieux (FR)

North America South America Europe Asia Rest of world

Net sales, SEK M 73,657 12,533 129,613 19,610 12,722

Percentage of the Volvo Group’s sales, % 30 5 52 8 5

Mack Trucks Macungie, New River Valley (US) Las Tejerias (VE) Brisbane (AU)

Renault Trucks Blainville, Bourg-en-Bresse, Limoges (FR), Villaverde (ES)

A global group

* Ownership ≥ 50%

Volvo Group customers are active in more than 180 countries worldwide, mainly in Europe and North America as well as to a considerable extent in Asia. Group sales of products and services are conducted through wholly owned and independent dealers. The global service network handles customer demand for spare parts and other services.

During 2006, the Group’s workforce rose to 83,187 employees in 58 countries. The majority of employees are based in Sweden, France and the US.

A key feature of the Volvo Group’s growth strategy is to increase its presence in emerging markets, primarily in Asia and Eastern Europe.

During 2006, the Group increased its sales in Eastern Europe by 41%. Volvo implemented investments in Asia during 2006 in Japan and China. These provided a platform for increased sales and in the long term are expected to con- tribute to the Group’s growth target.

2006 73.7 SEK bn

2000 38.2 SEK bn

2006 129.6 SEK bn

2000 66.3 SEK bn

2006 19.6 SEK bn 2000 8.7 SEK bn

2006 12.7 SEK bn 2000 3.4 SEK bn

2006 12.5 SEK bn 2000 4.7 SEK bn

Net sales 2006 Net sales 2000

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North America South America Europe Asia Rest of world

Net sales, SEK M 73,657 12,533 129,613 19,610 12,722

Percentage of the Volvo Group’s sales, % 30 5 52 8 5

Production facilities

Mack Trucks Macungie, New River Valley (US) Las Tejerias (VE) Brisbane (AU)

Renault Trucks Blainville, Bourg-en-Bresse, Limoges (FR), Villaverde (ES)

Volvo Trucks New River Valley (US) Curitiba (BR) Göteborg, Umeå (SE), Gent (BE) Bangalore (IN), Jinan* (CN) Durban (ZA), Brisbane (AU)

Buses St Claire, St Eustache (CA), Mexico City (MX) Curitiba (BR) Borås, Säffle, Uddevalla (SE), Tammerfors, Åbo (FI), Wroclaw (PL) Bangalore (IN), Shanghai*, Xian* (CN) Durban (ZA) Construction Equipment Asheville (US), Goderich (CA) Pederneiras (BR) Arvika, Braås, Eskilstuna, Hallsberg (SE), Konz-Könen (DE), Belley (FR), Wroclaw (PL) Changwon (KR), Shanghai (CN), Linyi* (CN)

Volvo Penta Lexington (US) Göteborg, Vara (SE) Wuxi* (CN)

Volvo Aero Boca Raton, Newington (US) Bromma, Trollhättan (SE), Kongsberg (NO)

Volvo Powertrain Hagerstown (US) Curitiba (BR) Köping, Skövde (SE), Vénissieux (FR)

North America South America Europe Asia Rest of world

Net sales, SEK M 73,657 12,533 129,613 19,610 12,722

Percentage of the Volvo Group’s sales, % 30 5 52 8 5

Mack Trucks Macungie, New River Valley (US) Las Tejerias (VE) Brisbane (AU)

Renault Trucks Blainville, Bourg-en-Bresse, Limoges (FR), Villaverde (ES)

A global group

* Ownership ≥ 50%

Volvo Group customers are active in more than 180 countries worldwide, mainly in Europe and North America as well as to a considerable extent in Asia. Group sales of products and services are conducted through wholly owned and independent dealers. The global service network handles customer demand for spare parts and other services.

During 2006, the Group’s workforce rose to 83,187 employees in 58 countries. The majority of employees are based in Sweden, France and the US.

A key feature of the Volvo Group’s growth strategy is to increase its presence in emerging markets, primarily in Asia and Eastern Europe.

During 2006, the Group increased its sales in Eastern Europe by 41%. Volvo implemented investments in Asia during 2006 in Japan and China. These provided a platform for increased sales and in the long term are expected to con- tribute to the Group’s growth target.

2006 73.7 SEK bn

2000 38.2 SEK bn

2006 129.6 SEK bn

2000 66.3 SEK bn

2006 19.6 SEK bn 2000 8.7 SEK bn

2006 12.7 SEK bn 2000 3.4 SEK bn

2006 12.5 SEK bn 2000 4.7 SEK bn

Net sales 2006 Net sales 2000

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The Volvo Group 2006

Additional improvements in profi tability Record number of product innovations

Acquisitions to strengthen market position in Asia

Strong sales growth. Net sales up 7% to SEK 248,135 M (231,191).

Continuing favorable earnings trend. Earnings for the year rose 25% to SEK 16,318 M (13,108) and the return on shareholders’ equity increased to 19.6% (17.8).

Major investments in R&D programs for the next generation of engines and products to ensure future competitiveness.

Consolidation of the Group’s presence in Asia as a result of the purchase of shares in Nissan Diesel and an agreement to purchase shares in Lingong, a Chinese manufacturer of construction equipment.

Earnings per share rose by 25% to SEK 40.20 (32.22).

Proposed dividend of SEK 25.00 per share and an extraordinary payment through a 6:1 share split in which the sixth share will be redeemed by AB Volvo for an amount of SEK 25 per share.

Key ratios 2004 2005 2006

Net sales, SEK M 202,171 231,191 248,135

Operating income, M1 13,859 18,153 22,111

Adjustment of goodwill (1,712)

Revaluation of shares 820

Operating income, SEK M 14,679 18,153 20,399

Operating margin, % 7.3 7.9 8.2

Income after financial items, SEK M 13,036 18,016 20,299

Income for the period, SEK M 9,907 13,108 16,318

Earnings per share, SEK 23.58 32.22 40.20

Dividend per share, SEK 12.50 16.75 25.00 2

Extraordinary payment per share, SEK 25.00 3

Return on shareholders’ equity, % 13.9 17.8 19.6

1 Excluding revaluation of shares in Scania AB and Henlys Group Plc in 2004 and excluding adjustment of goodwill in 2006.

2 Proposed dividend 2006.

3 According to the Board’s proposal.

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Organization

Volvo Trucks manufactures medium- heavy to heavy trucks for long-haul, regional transport, and construc- tion operations.

Renault Trucks offers many types of vehicles from light trucks for delivery to heavy trucks for long haulage.

Mack Trucks manufactures heavy- duty trucks primarily for construction, refuse and and heavy regional transports.

Business areas

Some 75 percent of the Group’s workforce of about 83,000 employees is employed in the eight product-related business areas. Linked to these companies are a number of business units that supply components and services to support the Group’s business areas globally. This organizational config- uration permits companies to work closely with their custom- ers and efficiently utilize Group-wide resources.

Percentage of the Volvo Group’s net sales, %

Percentage of the Volvo Group’s operating income, %

Position on world market

Business units The task of the business units is to develop and sup- ply components, services and support for the Group’s business areas.

The major business units are Volvo Powertrain, Volvo IT, Volvo Parts and Volvo 3P.

Volvo 3P

2,872

Volvo Powertrain 8,274

Volvo Parts

3,575

Volvo Technology 403

Volvo Logistics

1,004

Volvo Information

In total, the Volvo Group is Europe’s largest and the world’s second larg- est manufacturer of heavy trucks.

35,180 Number of

employees

Volvo 3P is responsible for product planning, product development and for purchasing for the Group’s truck operations.

Volvo Powertrain coordinates Volvo Group’s powertrain operations and supplies the Group’s business areas with integrated powertrain systems comprising diesel engines, transmission sys- tems and axles.

Volvo Parts supplies services to support the aftermarket for business areas within the Group.

Volvo Technology develops new technologies and business solutions for the Group companies.

Volvo Logistics develops and manages logistics solutions for the automotive and aerospace industries worldwide.

Volvo Information Technology supplies IT solutions for industrial and commercial processes within

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Buses

has a product range comprising city and intercity buses, coaches and chassis.

Volvo Penta provides engines and power systems for leis- ure and commercial craft, as well as for industrial applications such as gensets and water pumps.

Volvo Aero offers components for aircraft engines and space applications, plus a wide range of services for the aerospace indus- try.

Financial Services conducts operations in customer and dealer financing.

Construction Equipment

manufactures equipment for construction applica- tions and related indus- tries.

Volvo Buses is one of the world’s largest pro- ducers of buses.

Volvo Construction Equipment is the world’s largest manufacturer of dumpers and one of the world’s largest manufac- turers of wheel loaders, excavation equipment, motor graders and com- pact construction equipment.

Volvo Penta is the world’s largest producer of diesel engines for leisure boats.

Volvo Aero holds a lead- ing position as an inde- pendent producer, with engine components in about 90% of all large commercial aircraft delivered in 2006.

Financial Services coop- erates closely with the other business areas to strengthen the Group’s competitiveness.

7,762 11,049 1,652 3,505 1,139

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Volvo in society

The Volvo Group is one of the world’s leading suppliers of commercial transport solutions.

Our trucks, buses, construction equipment, marine and industrial drive systems and com- ponents and services for the aviation sector are important parts of the world’s transportation networks, which are in operation 24 hours a day, every day, throughout the year.

A truck must be capable of fulfilling important transpor- tation services 24 hours a day. It is a link in the distribu- tion chain, ensuring that society is provided with every- thing that is needed during the working day. That’s why Volvo Group trucks are an everyday sight as they go about their distribution services in urban traffic.

The demands placed on trucks and truck transports are high, regardless of whether they apply to heavy truck- driving operations in remote forest areas, or long-dis- tance transportation of fast-moving consumer goods.

High efficiency and low costs are vital factors, while safety, ergonomics and environmental considerations are also assigned top priority.

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Demands for availability and rapid transports are increasing continuously. Volvo Aero’s many years of experience and leading-edge competencies in the field of aircraft engine components enable its customers to focus on their own core businesses – namely to provide optimally effective transport services.

Volvo Construction Equipment’s yellow machines are used in work conducted in the most demanding environments and at every conceivable type of construction site – ranging from new highways, bridges and shopping malls to ditch digging and the transportation of materials in areas where there sim- ply are no roads. These machines are also used within the forest industry and the materials handling sector.

Volvo Penta is best known for its boat engines and marine drive systems. But the company also delivers drive systems for a wide range of other applications, such as generator units for use at airports and hospitals, irrigation plants and engines for use in forklift and ware- house trucks.

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Vision, mission and values

Volvo Group’s mission Our vision

Our values

By creating value for our customers, we create value for our shareholders.

We use our expertise to create transport-related products and services of superior quality, safety and environmental care for demanding customers in selected segments.

We work with energy, passion and respect for the individual.

The Volvo Group’s vision is to be valued as the world’s leading supplier of commercial transport solutions.

The Volvo Group views its corporate culture as a unique asset, since it is diffi cult for competitors to copy. By applying and strengthening the expertise and culture we have built up over the years, we can achieve our vision.

Quality, safety and environmental care are the values that form the Volvo Group’s

common base and are important components of our corporate culture. The values

have a long tradition and permeate our organization, our products and our way of

working. Our goal is to maintain a leading position in these areas.

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Quality

Quality is an expression of our goal to offer reli- able products and services. In all aspects of our operations, from product development and production, to delivery and customer support, the focus shall be on customers’ needs and expectations. Our goal is to exceed their expect- ations. With a customer focus based on every- one’s commitment and participation, combined with a process culture, our aim is to be number one in customer satisfaction. This is based on a culture in which all employees are responsive and aware of what must be accomplished to be the best business partner.

Safety

Safety is concerned with how our products are used in society. We have had a leading position in issues regarding safety for a long time; our goal is to maintain this position. A focus on safety is an integral part of our product devel- opment work. Our employees are highly aware of safety issues, and the knowledge gained from our internal crash investigations is applied in product development. Our goal is to reduce the risk of accidents and mitigate the conse- quences of any accidents that may occur, as well as to improve safety and the work environ- ment for the drivers of our vehicles and equip- ment.

Environmental care

We believe that it is self-evident that our prod- ucts and our operations shall have the lowest possible adverse impact on the environment.

We are working to further improve energy effi- ciency and to reduce emissions in all aspects of our business, with particular focus on the use of our products. Our goal is that the Volvo Group shall be ranked as a leader in environmental care. To achieve this goal, we strive for a holistic view, continuous improvement, technical devel- opment and efficient resource utilization.

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Market overview

Global economic trend

The global economy continues to register solid growth. In recent years, global GDP growth has ranged from 4 percent to 5 percent, the highest level since the 1970s. The positive trend is evident in most global regions but is particularly noticeable in China, Eastern Europe and other emerging markets.

Nowadays, these growth markets account for a substantial share of the world economy and represent an increasingly integral part of the global production system with their extensive trade. Their share of overall global exports is currently 40 percent, compared with 20 percent in the 1970s.

Transport requirements

Social developments worldwide are fuelling an expansion in trade, locally as well as among regions and continents. The growth in trade is creating higher transport requirements, both for goods and people.

Transport vehicle requirements are cyclical but the industry has an under- lying growth rate of about 4 percent annually in mature markets over a busi- ness cycle. In growth regions such as Asia and Eastern Europe, the growth rate is considerably higher.

Commodity prices

Rapid growth in global economy has resulted in high demand for energy. Oil prices have risen sharply in recent years, with a peak price of USD 75 per barrel in summer 2006. Prices levels have fallen since then, reaching about USD 59 per barrel at year-end 2006. While at the same time that there is a high demand for energy, the supply is limited, due partly to the political unrest in the Middle East, which affects prices. The prices of raw material to industry, such as metals and rubber, also rose during the year.

Fuel costs are a significant part of the operating cost for many of Volvo Group’s customers. Generally, Volvo Group customers have proven skillful in offsetting fuel costs.

05 06 03

02 04

USA Europe

Annual GDP growth.

Source: Consensus Economics

Growth in USA and Europe, % Growth in Asia and China, %

05 06 03

02 04

Asia China

Annual GDP growth.

Source: Consensus Economics

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An industry in flux

The transport industry is moving through a process of change in which increasingly stringent environmental standards are a major driving force.

Substantial investments are required for R&D programs involving new tech- nologies to reduce emissions from vehicles and for the development of alternative fuels and drivelines. To meet these challenges, consolidation is in progress among manufacturers through mergers and acquisitions.

In mature markets in the US and Europe, consolidation in the truck indus- try has been in progress over a number of decades and has made substan- tial progress. In other regions or sectors – such as Asia or the construction industry – the pressure to consolidate is expected to increase.

Meanwhile, new competitors have emerged as major regional players in growth markets with the aim of becoming global players. Restructuring creates the potential for the Volvo Group to further strengthen its positions in each business area by means of acquisitions.

Growth markets

The Volvo Group’s goal is to be the world’s leading supplier of commercial transport solutions. Volvo currently has well-established positions in the European and North American markets. However, the most rapid growth is occurring in regions in which the Group had very limited operations ten or 15 years ago. The Volvo Group plans to expand in these markets – in Asia, for example.

China and India are examples of markets that are already considerably large and will prove even more important for the Volvo Group’s future growth.

In addition, Eastern European markets are showing steep growth and the Group is well positioned to capitalize on expansion in these markets.

Heavy truck registrations, > 16 tons Three strong markets, heavy trucks

05 06 03

02 04

Europe North America

295 277 255 229 229

Vehicles, thousands

Consolidation – European truck manufactures

Mercedes Volvo Gräf u .Stift Lancia Scania Ford BMC Henschel Willeme Seddon Guy Steyr Commer Atkinson

Dennis Unic Saurer Fiat Leyland Krupp ÖAF Berliet Bussing DAF Magirus Berna OM ERF

Astra Hotchkiss Barreiros Bernard Bedford Saviem Pegaso FTF Dodge MAN Foden

Volvo Group DaimlerChrysler Paccar MAN Scania Iveco

1966 2006

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CEO comment

2006 was an exam year for our strategy. A new generation of products would be on the market, developed and produced in a new industrial structure. The new engines would have to meet the dramatically more stringent emission standards in Europe, the US and Japan. As we had anticipated, it was an industrious year – and a great success. 2006 was a record year.

Challenging assignment

>>> Already at the acquistion of Renault Trucks and Mack six years ago, we knew that the road ahead was going to be challenging. We faced the integration of thousands of employees into new units, changing from three different pro- duction systems for engines to one common system, shrinking the engine families from 18 to two and coordinating the truck companies’

purchasing, product planning and product development in a new unit. In addition, the units for IT, logistics and spare parts were assigned to take a Group-wide lead for coordination within their areas. All these actions were aimed at gaining maximum benefit from the technical resources and our combined volumes.

We also had aggressive plans to strengthen and expand the dealer network to provide bet- ter service to customers and advance our pos- itions on new markets.

New and more efficient structure Accordingly, there were many reasons for con- cern at the beginning of 2006. We had never previously implemented such a comprehensive product renewal. We phased in new production systems at the same time as we phased out the old. This was in a booming business climate, with plants operating at peak capacity.

Concurrently, we put time and resources into the investments in Asia and Eastern Europe.

Naturally, we are very proud that we suc- ceeded in realizing our plans. In all significant respects, we carried out the changeovers as

scheduled and although they increased costs temporarily our new products rolled out in a proper manner. The Group is now well consoli- dated and our own as well as independent deal- ers have a highly positive development.

Successful products

The solid order bookings at the end of 2006 and beginning of 2007 demonstrate the strength of the new product generation. The diesel engines are leading in fuel efficiency and provide competitive advantages for all of the Group’s vehicles and equipment. As a result of the more efficient structure, we have been able to free up resources to develop more customer-adapted variants, which further strengthen positions. As a result of the increased benefits for the customer, we have been able to price our vehicles, equipment and services at the right levels.

Group-wide production

The changes implemented are not solely sig- nificant structurally, but also important for the internal transfer of know-how. Increased coor- dination and common technical solutions have resulted in improved quality. Step by step we are developing a Group-wide production method based on standardization, best prac- tice and a common corporate culture.

Raised financial targets

Since the changes yield effects in the form of a structurally higher profitability, the Board

decided to raise the Group’s financial targets.

We are now aiming at an average operating margin of more than 7 percent over a business cycle, adding also another, currently, one per- centage point from the financing operations.

The growth target of 10 percent annually is retained.

Aggressive strategy for growth

The strategy to reach the growth target is to grow geographically and at the same time broaden our offering to customers. We expect organic growth of 5–6 percent and to obtain the remaining percent through acquisitions. In line with this, the Board has sought a distinct balance between the need for financial free- dom of action for long-term value growth and an attractive level for annual share dividends.

Geographically, we are targeting the fast- growing economies in Eastern Europe and Asia.

The economies in Eastern Europe are in a very dynamic phase and new transport patterns are being established. For many years we have been active in this region extending the dealer network and services. This is now bearing fruit.

The nearly 40 percent sales increase during 2006 is evidence that we are taking a share of the rapid economic growth.

Major potential in Asia

Since the quality and emissions standards in countries such as China and India are still rela- tively low, the challenge in these countries is greater. Pricing is different and local manufac- turing is a necessity for competing with domes- tic producers. However, in the long term we see the greatest potential for growth in Asia.

A favorable sign for the environment and our development is China’s ambition to establish more stringent emission standards.

In general, we foresee an increasing global harmonization of technical as well as environ- mental demands, which strengthens our pos- ition since we have gone further than the com- petition in developing a global product program.

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With investments in India and China, we aim to share in their growing economies, in the man- ner that we are now experiencing in Eastern Europe.

New phase in Asia

In order to strengthen our position in Asia, we have taken several steps of significant strate- gic importance. Within the truck segment, we established a strategic alliance with Japanese Nissan Diesel. To start with, we acquired a 19 percent holding in Nissan Diesel and in Fe - bruary, 2007, we made a public offer for the whole company.

Nissan Diesel holds a solid position in Japan and the rest of Asia. A merger would give advantages within product development and purchasing as well as within the production of engines and drivelines. Gains also arise in that the companies are given access to each other’s dealer and service networks.

The cooperation with Nissan Diesel has also resulted in more in-depth discussions about future coordination with China’s largest truck manufacturer, Dongfeng Motors.

In China we have also entered an exciting new phase through the purchase of 70 percent of the Chinese wheel loader manufacturer Lingong. As the first foreign manufacturer of construction equipment, we gain a base with a nationwide dealer network in China.

Broader offering to customers

Parallel with investments on new markets, we are increasing efforts to expand our offering of services, accessories and spare parts. We view this as our greatest possibility to create long- term growth in established markets. In this respect, we are working with intensifying coop- eration with customers to develop broader business solutions. Customer financing is an important component in this respect and for expansion in markets with a less developed credit system.

An important part of our strategy for increased profitability is the growth of ser- vices, accessories and spare parts.

New technology for a better environment

As a vehicle manufacturer, we have major responsibility for the en - vironment and to contribute to a sustainable society. We view this responsibility with the greatest seriousness. We have set very high goals to reduce energy con- sumption in production and to make more of our plants carbon - di oxide neutral. In the midst of this tough period I have described, we have also inten- sified the development of alternative drive- lines to reduce fuel consumption and the emission of greenhouse gases. Among other activities, we presented our fuel- efficient hybrid technology in 2006, which we plan to have in production in 2009.

Successful integration work

I wish to thank all employees for an excel- lent job. In my opinion, and that of the Board, we have succeeded well with the difficult task of integrating new companies and implementing structural changes. This is thanks to our hard work each day in an organization that has per- formed in a disciplined and motivated manner.

2007 will be an exciting year during which we will have the entire new product generation on the market and take new strides in the expansion eastward.

Leif Johansson President and CEO

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Our customers’ needs govern our strategy…

The Volvo Group’s customers mainly conduct transport-related operations.

They impose rigorous requirements on both products and services. In a competitive market, customer satisfaction is a key factor, since it assures future sales and is essential for healthy profitability.

Developing and broadening cooperation with customers

Close cooperation with customers is decisive for enabling the Volvo Group to better understand their needs and meet their expectations with the right products and services.

Quality in the Volvo Group’s offering is also linked to how customers are treated and how services are performed. While product characteristics and quality are of key importance, it is above all the people in the Volvo Group, and their skills, values, attitudes and conduct, which create success.

The Group must constantly be able to offer customers the solutions that are best commercially for their operations. At the same time, customers’

experience of the brands should be consistent and in line with the Group’s basic values. This applies both within the Group and at dealerships.

Accordingly, the Volvo Group works continuously to develop its dealership network with the aim of further improving its service to customers.

Building strong relations with key customers

The Volvo Group strives to forge closer relations with key customers. There are several advantages; the Group can support customers’ growth even more effectively than before, while simultaneously helping to broaden the offering of products and services to existing customers. In this way, the Volvo Group can benefit from its broad range of products and services and establish synergies with key customers.

The foremost argument for Coca- Cola in selecting Volvo in the early

‘90s was the extensive Volvo ser- vice network. Volvo still has the most widespread service network of all foreign truck manufacturers operating on the Russian market today.

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Profitable growth

Since 2001, the Volvo Group has had an average annual growth rate of 7 percent, which has been achieved through both organic growth and acqui- sitions. The Volvo Group’s objective is to continue growing with focus on profitability. The growth target is 10 percent annually over a business cycle, which will be achieved through organic growth and through acquisitions at approximately equal proportions.

Expanding geographic coverage and product offering

The Volvo Group holds established positions in markets in Europe and North America. Today, however, the most rapid growth is occurring in markets where the Group had very little business only ten to 15 years ago. In growth markets, a stronger position and increased market shares are to be achieved by attracting new customers and through strategic alliances. The Group is making large investments in the dealer and service networks and concur- rently carrying out a number of acquisitions. The aim is for markets outside Europe and North America, such as India, Japan, China and Russia, to account for a substantial portion of the Group’s total sales in the long term.

The aim in established markets is for an expanded customer offering, with an increased proportion of sales in the aftermarket and a high propor- tion of services to contribute to achieving the growth target. Strong brands increase customers’ trust and create loyalty to the Group’s products and services, thereby supporting profitable long-term growth.

Activities during a business cycle

The sectors in which the Volvo Group operates are exposed to economic fluctuations. The Volvo Group endeavors to actively handle both upswings and downturns in each sector to achieve better profitability. The strategy of developing aftermarket services and growing in new markets enables the Group to achieve a more favorable balance between all the phases of a busi- ness cycle.

10 %

Volvo’s aim is to grow by 10 per- cent annually. Growth will be achieved organically as well as through acquisitions.

1

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Innovation and product development

Renewal and concept development

Development of innovative technology is the key to success for new genera- tions of products, and to maintaining market-leading positions in the future.

Efforts are constantly under way within the Group to improve the per- formance of products and thereby strengthen competitiveness. At the same time, research looking even further into the future is conducted in order to achieve new technical breakthroughs.

The Volvo Group cooperates worldwide with a large number of external partners in projects and forums that allow experience to be exchanged and contact to be made with cutting-edge technologies and innovations. The Volvo Group will continue to actively exchange information with many differ- ent players, such as universities, research institutes, customers, suppliers and government authorities.

Providing a complete, customer-oriented offering

For a global organization such as the Volvo Group, product planning must ensure that the right products with the right specifications are offered in the right markets. Accordingly, products typically offer an extensive range of customer adaptations. Product adaptation supports the distinctive features of each brand and its competitive advantages as seen from the customer’s perspective.

Improving fuel efficiency and increasing the use of alternative fuels

It is a major challenge to create a sustainable society that does not jeop- ardize the environment for future generations. The Volvo Group is a driving force within the transport industry in such areas as energy and the environ- ment. This undertaking seeks to attain a gradual transition from fossil fuels, such as oil and natural gas, to fuels from renewable sources and hybrid drive systems.

Product development has to be based on requirements from the customers. Volvo CE invites se l- ected customers at an early stage when new products are to be designed. Customers give the company valuable feedback on what needs they have and what features should be included in coming products.

2

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Highest quality in implementation

Enhancing productivity and cost-efficiency

The Volvo Group strives to continuously optimize cost-efficiency and pro- ductivity in all parts of its operations. This contributes to increased profit- ability and improves the Group’s capacity to handle economic fluctuations.

Part of the internal cost-efficiency work involves reducing production costs and the costs for sales and administration. Product costs must be constantly scrutinized and kept to a minimum to generate competitiveness without compromising on quality.

The Volvo Group strives to be characterized by the highest quality. Getting it right from the start increases customer satisfaction, keeps costs down and saves time and energy.

The Volvo Group plans to continue with the introduction of the Volvo Production System (VPS), which was designed to establish common pro- duction processes throughout the Group. VPS increases flexibility and effi- ciency in the industrial organization. It is also expected that VPS will create value for customers through improved quality, more reliable deliveries and reduced costs.

Execution in focus

A key competitive advantage in the commercial transport sector is the capacity to be efficient and suited to purpose. The Volvo Group’s capacity to handle development projects, combined with its ability to rapidly introduce processes for new ways of working, contributes to improved results.

Maintaining expertise

The Volvo Group is growing in new geographic markets and developing new technology, as well as meeting a number of demographic challenges. It is therefore vital to develop the appropriate expertise to assure the Group’s future competitiveness.

Diversity is a commercial driving force and a source of international com- petitiveness and hence profitability. The Volvo Group is increasing its efforts to benefit from the strength that stems from diversity in terms of gender, age, ethnic background and education, among other areas.

The quality of leadership is another key success factor for the Volvo Group’s capacity to generate future business.

We work continuously with our processes with the aim to increase quality and to optimize manufac- turing.

3

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Financial strategy

New financial targets – Structurally higher profitability, stronger cash flow and lower risk

Volvo’s Board of Directors believes that the Volvo Group currently has structurally higher profitability, stronger cash flow and lower risk. Consequently, in September 2006 the Board decided to revise the company’s financial targets. The three financial targets cover growth, profitability and capital structure.

Focus on commercial transport solutions

The streamlining of the Volvo Group, which commenced with the sale of passenger car operations in 1999 and continued in the form of a number of successful acquisitions, has created a strong group with a renewed focus on commercial vehicles and equipment. A new organization featuring business units with Group-wide responsibility for engines and product development, purchasing and product planning has fuelled in-house efficiency pro- grams and ensured the realization of the con- siderable potential synergies. These targeted efforts have created business areas that indi- vidually have strong positions in their particular markets, while simultaneously capitalizing fully on the potential offered for coordination and cooperation deriving from the dramatically higher volumes of engines and other products.

Overall, the Volvo Group’s new composition has led to structurally higher margins and stronger cash-flow. Higher earnings have led to a sharp increase in dividends in recent years, while also creating resources that have been used for product development, geographic

expansion and other developments. In turn, this has resulted in geographic and product diversification that has also reduced risk in the company. Moreover, the Volvo Group’s strong - er focus on aftermarket operations, which are less sensitive to economic trends has contrib- uted to reducing risk.

Financial strategy

The purpose of Volvo’s long-term financial strategy is to ensure the best use of Group funds in providing shareholders with a favor- able return and offering creditors reliable security.

However, a prerequisite for the long-term competitive development of the company is the availability of sufficient financial resources to secure investments and active participation in industry consolidation worldwide, thereby maintaining a strategically competitive pos- ition in all business areas.

The Volvo Group’s financial resources will be used for investments, acquisitions and a competitive dividend with a stable and long- term development. Any surplus capital will be transferred to the shareholders.

New financial targets

• Growth in net sales should increase by at least 10 percent annually.

• Operating margin should exceed 7 percent for for the Group’s industrial operations over the business cycle.

• Net debt should be a maximum of 40 percent of shareholders’ equity.

The growth target of 10 percent annually will be achieved through organic growth and through acquisitions at approximately equal propor- tions.

The Volvo Group’s new profitability target is that operating margin is to exceed 7 percent annually over a business cycle. The target cov- ers all Group operations, except Financial Services, which currently contributes approxi- mately one additional percentage point.

The Volvo Group’s capital is intended primar- ily for the financing of acquisitions, and for maintaining a high level of financial flexibility, any surplus capital will then be transferred to Volvo’s shareholders. The limiting level of net debt to a maximum of 40 percent should mainly be regarded as a reserve that can be used in the event of a major acquisition.

The financial resources of the Group must be used as efficiently as possible to ensure and further strengthen the profitability within the

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Net sales growth1, % Operating margin1, %

7.9 05

8.92 06 1.6

02 0 7 5

1.4 03

7.3 04 Growth

Volvo Group’s growth target is that net sales should increase by a minimum 10%

annually. This objective will be achieved through organic growth and acquisitions.

Net sales rose 7% in 2006. During the period 2002–2006, the average growth rate – excluding divested operations – was 7% annually.

Operating margin

The Volvo Group’s new profitability target is that operating margin is to exceed 7%

annually over a business cycle.

The operating margin for 2006 was 8.9%. The average annual operating mar- gin for the Volvo Group was 5.4% from 2002 to 2006. The previous target for the operating margin was 5% to 7% over a business cycle, including the operations of Financial Services.

Capital structure

The capital structure target was changed from a net debt of a maximum 30% of shareholders’ equity to a maximum 40% of shareholders’ equity.

As of December 31, 2006, the Volvo Group had a net financial position corre- sponding to 28.3% of shareholders’ equity.

1 Years 2004, 2005 and 2006 are reported in accordance with IFRS and 2002 and 2003 in accordance with pre-

Group and thereby securing the return of equity to the shareholders. This is particularly impor- tant since the Volvo Group operates in a cycli- cal industry, which is also in a consolidation process in which costs will be increased for integrating acquired operations.

Financial Services

The target for Financial Services is a return on shareholders’ equity of 12–15 percent and an equity ratio of 10–12 percent. At the end of 2006 total assets in Financial Services

amounted to approximately SEK 84 billion and the equity ratio was 11.5 percent.

Long-term credit rating

The purpose of Volvo’s capital structure is to balance expectations from the stock markets and other financial stakeholders. Each year, Volvo meets with credit rating institutes to dis- cuss the lender’s view of the company and to assess the Group’s future ability to repay loans that mature. The Group’s goal is to maintain good credit ratings as a base for favorable

financing of certain operations through loans.

Volvo has received an A3 credit rating from Moody’s Investor Services. The long-term A3 credit rating provides access to additional sources of financing and improved access to the financial market. A3 is among the highest credit ratings in the transport and automotive industry and one of the highest among Nordic industrial companies.

14 05

7 06 (2)

02 0 10

(1) 03

16 04

23.7 05

28.3 06 (7.7)

02 (3.3)

03 25.8

04 40

20

−20

−40 0

Net financial position as percentage of shareholders’ equity1,%

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Leading supplier of commercial transport solutions

The Volvo Group’s mission includes “using our combined exp ertise to create transport-related products and services of superior quality, safety and environmental care for demanding customers in selected segments.”

Through constant development and improve- ment of products and services, the Group’s competitiveness is strengthened at the same time as value is created for customers, thereby helping to create future value for shareholders.

It is not enough to manufacture and sell high-quality products to realize the Volvo Group’s vision of being the world leader in commercial transport solutions. Many custom- ers expect complete transport solutions, which creates a need to be able to offer various ser- vices, accessories and spare parts to support

key products.

Vehicles and equipment The Volvo Group is the world’s largest manu- facturer of heavy-duty diesel engines for com- mercial use and also a significant manufacturer of drivelines for heavy vehicles. The Group has manufacturing, research and development facilities for drivelines on three continents and its products are offered in more than 180 mar- kets around the world.

Drivelines are designed so that they can be adapted a large number of applications in most of the Group’s products. Diesel engines are used in trucks, buses and construction equip- ment as well as in boats and industrial applica- tions such as, for example, generator sets.

The strongest driving force to development of drivelines is customers’ needs and requests.

The new Renault Midlum and Renault Premium Distribution

New Renault Midlum and Renault Premium Distri–

bution vehicles were launched in 2006. These latest models feature the new 5- and 7-liter engines (Renault Midlum) as well as 7- and 11-liter engines (Renault Premium Distribution), which comply with Euro 4 emission requirements. Certain models are also prepared for the Euro 5 standard, which will come into effect in 2009.

World premier for Volvo 7700

The new version of the Volvo 7700 city bus was unveiled in June 2006. The major innovation in the Volvo 7700 is the switch from a 7-liter to a 9-liter engine, which is available in both diesel and gas ver- sions. As a result of Volvo selecting SCR catalyzer technology, Volvo Buses can now offer customers an engine that meets both the Euro 4 and Euro 5 stand- ards, while also cutting fuel consumption.

Volvo Group’s hybrid technology for heavy vehicles and machinery

At the beginning of the year, the Volvo Group pre- sented a new, efficient hybrid solution for heavy vehicles. The Volvo Group’s hybrid technology offers the largest fuel savings on stretches involving con- siderable braking and acceleration, as in the case of city buses, city distribution operations, refuse appli- cations and construction work. Fuel savings are up to 35% in these applications.

Products

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Services

Volvo Trucks has in the recent years developed its retail network in Europe through the wholly-owned Volvo Truck Centers. This is an important part of the company’s strategy to work closer with the customers and hereby be able to be more efficient when it comes to distribution, service and marketing.

Accessories

Customers are offered a wide range of accessories.

Volvo’s wheel loader, for example, can be fitted with a number of different tools to help with various tasks.

Financing

Financial solutions are vital to the Volvo Group. The customer offering includes traditional financial ser- vices such as installment contracts, operating and financial leasing and dealer financing.

Accessories, spare parts and services

Today, soft products account for a significant share of the Group’s total sales and is expected to grow further in the years ahead.

Products that feature reliability, durability, driv- ability and fuel economy help to increase cus- tomers’ profitability and productivity. The Group’s goal is to exceed customer expecta- tions at a lower price than the competitors.

Accessories, spare parts and services

The Volvo Group’s vision is to be the world leader of commercial transport solutions.

Most transports require, in addition to the vehicle, a number of accessories or services to carry out specific transport assignments in the best way. This is where the Volvo Group’s wide selection of accessories, spare parts and ser- vices, or soft products, enter the picture.

This selection of services includes a range of financing solutions, rental services, used trucks, service contracts and IT services.

Because the accessories, spare parts and services businesses predominately belong to the aftermarket, these serve to balance fluctu- ation in the economy. By increasing the selec- tion of soft products, the Group’s profitability is increased throughout the entire business cycle.

The strategy of increasing sales of accessor- ies, spare parts and services is also important for reaching the Volvo Group’s profitability and growth targets, particularly in mature markets.

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However, crucial to our success is that we must successfully continue developing the intellectual capital and stimulate exchange of thoughts and ideas.

Torbjörn Holmström, President, Volvo 3P

I N T E R V I E W

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The Volvo 3P business unit has contributed strongly to the improved profitability in recent years within the Volvo Group in general and the truck units in particular. Despite this, Volvo 3P is unknown to most people outside the Group.

Volvo 3P combines development In a newspaper, Volvo 3P was described as probably the most unknown business unit of the Volvo Group. And Torbjörn Holmström, who has been the President of Volvo 3P since 2003, has no objec-

tions to that. “Volvo Trucks, Renault Trucks and Mack Trucks are natur-

ally the ones that should be vis- ible externally, but it could be said that we are the cement or even the soul in the collaboration between the three truck brands,” says Torbjörn.

Volvo 3P is namely responsible for several significant areas, which are not always visible to customers, shareholders or other stakehold- ers, but which are significantly important to the Group’s profitability. The areas of responsibility

&

DEVELOPMENT

SYNERGIES

Torbjörn Holmström

Torbjörn Holmström, born in 1955, has been the President of Volvo 3P since 2003. Between 1999 and 2003, he was an executive at Volvo Powertrain.

During the first two years, he was responsible for transmission development and the last two years for driveline development. He has held other executive positions at Volvo Powertrain and was responsible for drivelines at Volvo do Brasil. Torbjörn Holmström received an engineering degree from Chalmers

Volvo 3P in brief

Volvo 3P is a business unit responsible for product planning, product development and purchasing for the three truck companies, Volvo Trucks, Mack Trucks and Renault Trucks.

The business unit has 2,872 employees and offices in Gothenburg (Sweden), Lyon (France), Allentown and Greensboro (USA), Curitiba (Brazil), Bangalore (India), Shanghai (China) and Brisbane (Australia).

are summarized in the three ps: product plan- ning, product development and purchasing.

And, it stretches over the entire Volvo Group’s global truck operations.

The mission is to produce synergies and industrial efficiency. In daily numbers, this means that Volvo 3P must produce improved products at lower costs than in the past. And, there is a great deal of cost savings to be made.

Each year, Volvo 3P and Volvo Powertrain make purchases for nearly SEK 70 billion and the Volvo Group invests about SEK 8 billion in research and development.

“The Volvo Group saved a total of SEK 3.8 billion already two years after the acquisitions of Renault Trucks and Mack Trucks. With regard to Volvo 3P, profits to date were primarily from purchasing, but we estimate that jointly with Volvo Powertrain we will contribute a similar amount in 2006 and 2007, as the new trucks are introduced. The new trucks contain several more components and systems that were developed and purchased jointly,” explains Torbjörn Holmström.

References

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